US embassy cable - 05TEGUCIGALPA2447

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002447 
 
SIPDIS 
 
STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN 
TREASURY FOR DDOUGLASS 
COMMERCE FOR MSIEGELMAN 
DOL FOR ILAB 
STATE PASS AID FOR LAC/CAM 
STATE PASS USTR FOR AMALITO 
 
E.O. 12958: DECL: 12/06/2015 
TAGS: ECON, EFIN, PGOV, ELAB, SOCI, HO 
SUBJECT: CORRECTED COPY: HONDURAS: IMF INCREASINGLY 
CONCERNED BY LIKELY PRESIDENT-ELECT'S COMMENTS REGARDING 
TEACHERS' WAGES 
 
REF: TEGUCIGALPA 1993 AND PREVIOUS 
 
Classified By: Economic Chief Patrick Dunn for reasons 1.4 (b) and (d). 
 
-- Corrected copy:  Corrected Clearance Information. -- 
 
1. (C) Summary: Not even formally elected yet, Liberal Party 
presidential candidate Manuel "Mel" Zelaya has already raised 
concerns by calling into question his resolve regarding his 
pledge to honor the GOH agreement with the IMF to reform 
teachers' wages and benefits.  Worse, Zelaya has also 
nominated as his new Minister of Education Rafael Pineda 
Ponce, the author and staunch defender of the 
highly-problematic teachers' benefits bill.  In his press 
conference, Pineda further exacerbated concerns by 
speculating that acceding to teachers' demands could be paid 
for from debt forgiveness savings -- a tactic that could 
violate both the terms of Honduras' HIPC debt relief and of 
the GOH's agreement with the IMF.  As soon as Zelaya is 
officially declared the winner, Post will seek to meet with 
his team on this issue to stress the risk such proposals pose 
to the significant advancements the GOH has made over three 
years of relative fiscal austerity.  End Summary. 
 
2. (C) Both Post and the International Monetary Fund are 
increasingly concerned by the tenor and substance of comments 
by presumptive Liberal Party president-elect Manuel "Mel" 
Zelaya Rosales concerning the politically and economically 
sensitive topic of teachers' wages and benefits.  (On 
December 2 Ambassador and EconChief spoke with IMF Resident 
Representative about this issue.)  In a November 30 press 
conference, Zelaya proposed beginning negotiations with the 
teachers' union in December to "revise all policies in the 
education sector."  He went on to say that the FY 2006 budget 
(drafted but not yet approved by Congress) would be reviewed 
"so that all the programs we want to pursue are included in 
the budget...the same for negotiations with the teachers this 
month, and the same goes for education budget authorizations, 
which will also be discussed this month." 
 
3. (C) These remarks follow on stronger comments (reftel) 
from September 22, in which Zelaya promised teachers' unions 
not only his support, but also a "strengthening of the 
teacher's benefits law."  This law, known as the &Estatuto 
de Docentes,8 has been the source of much controversy, as it 
established in 1997 under the Reina Administration (Liberal 
Party) benefits outside the normal civil service wage scale 
that increase at multiples of the established increases in 
minimum wage.  The resulting exponential growth in wages has 
wreaked fiscal havoc, raising total public sector wages from 
approximately six percent of GDP a few years ago to nearly 
eleven percent in 2005. As part of its agreement with the 
International Monetary Fund, the GOH agreed to formulate a 
plan by 2005 for incorporating these benefits into the normal 
wage scale, and for implementing that plan by 2007. Zelaya's 
economic team went to great pains following Zelaya's 
September 22 remarks to reassure Post and the IMF that 
Zelaya's comments did not foretell a breaking of faith with 
the IMF over this issue. 
 
4. (C) On Wednesday, November 30, former presidential 
candidate Rafael Pineda Ponce announced he had accepted 
Zelaya's offer to serve as Minister of Education.  Pineda 
Ponce was formerly Minister of Education and was President of 
Congress in 1997 -- when he co-sponsored the offending 
teachers' benefits law -- and has been a staunch defender of 
the benefits package ever since.  Pineda told reporters on 
November 30 that the Zelaya administration would seek to 
satisfy teachers' wage and benefits demands dating back as 
far as 1997.  This would result in an unbudgeted outlay that 
would cost the GOH an estimated 550 million lempiras 
(approximately USD 29 million) according to press reports. 
Asked where he would get such funds, Pineda reportedly cited 
the debt service payment savings that resulted from recent 
HIPC-related debt forgiveness. 
 
5. (C) In a December 1 conversation with EconChief, a World 
Bank official emphasized that reform of the estatutos is not 
just a fiscal issue, but is also important from a management 
and delivery of service perspective.  Pay and benefits should 
be tied to performance, and an expenditure policy for the 
entire sector should be crafted.  While Pineda's remarks 
"raise concerns," the official saw these and similar remarks 
as a continuation of the campaign's rhetoric, since the final 
victor has not yet been declared.  Moreover, he noted, such 
spending decisions are not made by the Minister of Education 
in any case, but by the Minister of Finance, and therefore 
until the Ministry of Finance makes a policy pronouncement on 
this issue it is still just one Minister thinking out loud. 
As for use of HIPC funds, the World Bank official stressed 
that poverty alleviation could be accomplished even with some 
spending on recurrent wage expenses, but that such spending 
needed to be tied to reforms that encouraged the educational 
system to produce better results.  Simply approving a 
sector-wide wage hike would certainly violate the spirit of 
HIPC, he said. 
 
6. (C) Comment:  Though not yet even officially the 
President-elect, Zelaya and his team have already grabbed a 
political hot potato, at the risk of both inflaming passions 
in Honduras and -- in the worst case -- risking the ire of 
donors who are in the process of concluding debt forgiveness 
agreements.  By pandering to the teachers, Zelaya exposes his 
future administration to dangerous political pressures, such 
as those that led to a 33-day teachers' strike in 2004, from 
which President Maduro never fully recovered.  If Zelaya 
seeks to implement this policy, it is unclear how he would 
fund it.  Under HIPC rules, debt forgiveness must be used for 
poverty alleviation.  While a poverty alleviation program can 
include spending in the educational sector, it generally 
should not include recurrent expenses (such as wages and 
benefits).  If Zelaya used debt forgiveness funds for an 
across the board salary or benefits increase, he would likely 
be in violation of HIPC. 
 
7. (C) Furthermore, failing to reform the estatutos 
contravenes the GOH agreement with the IMF and the oral 
pledge made by Zelaya to IMF Western Hemisphere Director 
Anoop Singh in a March 2005 meeting also attended by 
President Ricardo Maduro and National Party presidential 
candidate Porfirio "Pepe" Lobo.  When added to revenue losses 
from the December 2005 end of parastatal telephone company 
Hondutel's monopoly and potentially sharp revenue losses from 
proposed cuts to fuel taxes, Zelaya's package for teachers 
could plunge the GOH into greater fiscal deficit, reversing 
recent progress, and setting the stage for future spiraling 
wage costs not only for teachers, but potentially for doctors 
and nurses as well. 
 
8. (C) Comment continued:  Zelaya's comments are troubling, 
and are made more provocative by his nomination of Pineda to 
the head the Education Ministry.  With Pineda in charge, 
reform of the estatutos will be much more difficult, with 
consequent risks to the IMF program here.  The IMF will 
grapple with this issue at its Board meeting on December 16. 
In addition to the fiscal impacts of these proposals, the 
Fund also notes that the policy intentions spelled out in GOH 
documents currently before the Board apparently do not 
reflect the policies of the incoming administration.  While 
the HIPC debt relief has largely been signed and delivered 
already, Post believes that the December 21 G-8 Board meeting 
to discuss debt relief offers an excellent opportunity to 
send a strong signal to the new Zelaya administration that we 
expect continued dedication to fiscal discipline and genuine 
efforts at poverty alleviation. 
 
9. (C) Comment continued:  Post will raise the issue of 
fiscal discipline with the Zelaya camp as soon as possible. 
For the moment, however, Zelaya has not yet been declared the 
winner of a contentious and slow electoral process.  Neither 
Post nor the IMF can therefore engage Zelaya on issues of his 
policies or cabinet selections without de facto recognizing 
his victory and risking upsetting a tense political 
cease-fire between Zelaya and National Party presidential 
candidate Pepe Lobo.  End Comment. 
 
Ford 
Ford